Tuesday 15 September 2015

0% chance of UK rate rise this year

Bank of England Interest Rate since 2009
That is not much of a prediction now, but one that would have seemed unlikely 6 months ago. It is now 7 years since interest rates were rapidly reduced to near zero.

It was an emergency measure. As a rule of thumb, interest rates have become a good guide as to how messed up our economy is. Here we are seven years late and still stuck in 'emergency measures.'

And there is little sign of this changing, with Share prices having dipped 10% in the last few months and commodity prices continuing to fall, there is no external inflation to impact the UK. China has devalued too, meaning our imports will cost less for Christmas.

There are some inflationary worries, construction has started to drop off as prices of labour have gone up 20% as a lack of supply of key skills starts to bite; but even here this is cyclical industry that is always hit when growth comes as they are the first to lay off everyone in weaker times.

Meanwhile, the deficit and national debt get harder to reduce, as does private indebtedness, as many debts are not eroded away by inflation over time. Real things, like UK House prices, become more expensive than ever as their real terms increase in price is larger than it ever use to be.

Sustaining growth in a deflationary world will be a very difficult task for the economies of the West; just as they have found in Japan.

When will inflation return? That is an even harder prediction. Wage inflation has been so limited by immigration and automation over recent years. Perhaps an unintended consequence of the Government's decision to increase minimum wages will be to push some inflation into wages over the next 2 years. Equally, commodity markets must be entering the final down phase by now - indices' are all at decade lows or worse. With commodity falls coming out of the picture and domestic demand slowly picking up then inflationary pressures will growl; but it looks like a slow rise from here if most external shock are likely to be deflationary rather than inflationary.

Perhaps rates will still be at 0.5% this time next year? Who would have thought that in 2009.


Steven_L said...

My comment on that 2009 post look like by far the most accurate.

Lord Blagger said...

Meanwhile, the deficit and national debt get harder to reduce, as does private indebtedness, as many debts are not eroded away by inflation over time.


Fixed rate debts can be inflated away.

However inflation linked debts? Not a hope. You have to pay them off or default.

And the state's debts?

1.5 trn of gilts. 375 bn is QE. Money the state owes to itself. Irrelevant. 222 bn of inflation linked gilts. Doesn't leave much?

9.2 trillion of pension debts all inflation linked.

PFI, ...

So 10% of the debt is fixed rate when it comes to the state.

Inflation doesn't solve the state's problem of overspending and too much debt.

Sebastian Weetabix said...

We need interest rates to rise... to force BTL landlords to liquidate their assets and push housing prices down. We also need zombie companies to die. Then the economy will start to right itself again. The more it is put off, the worse it will be when it finally does happen.

CityUnslicker said...

SW - Housing prices won't drop whilst the economy recovers and immigration remains above housing building capacities.

SL - yes, lots of the comments were insightful eh!

Jan said...

Not sure house prices won't drop in the London bubble at least as I would posit that it is the availability of mortgage finance which is the main driver of house prices more than supply. Look what happened when Help-to Buy and FLS (Funding for Lending) took place? Help to bank(er)s more like and making more hugely indebted wage slaves.

Agree BTL is part of the problem but hopefully the tax changes will take care of that.

Electro-Kevin said...

"Housing prices won't drop whilst the economy recovers and immigration remains above housing building capacities."

and Jan's 'mortgage finance is the main driver of house prices'

Welfare provides a glass bottom to the housing market. It enables overcrowding in London which, in turn, gives the all important confidence at the other end of "the market will keep rising" argument, that it won't fall below a certain point either.

Imagine what would happen to the London housing market if all the unproductive people were dispersed to empty housing in the midlands ?

The mortgage financiers base their lending on risk - and when the housing market is underwritten from the welfare budget they feel confident in lending money on this commodity.

Immigration isn't a sure fire thing on pressuring the house bubble - the quality of the immigrants (and the jobs they can get) is key here. Otherwise rising welfare debt and national bankruptcy is the future. Actually it's the reality, here and now.

Guess what ? In a broke country things seem very expensive - housing. Population pressure doesn't lead to wealth in itself. It leads to hovels and poverty.

andrew said...

Normal Causes of inflation:-

-Exchange rate depreciation
-Monetary Stimulus (printing money)

-Energy/ Raw material costs
-Tax rises

Apart from housing, I see no liklehood of things changing for a long time

- years

CityUnslicker said...

Jan - the only amusing thing in London re property (something which my day job entails knowing in excessive detail) is that there are 1000's of multi-million pound flats due to come to market in the next 2 years and a lack of takers. The top end, whacked by the stamp duty hit, is suffering a marked decline.

More widely though, the desperation for housing under 500k is intense in both rental and buying sectors. Mortgage lending remains robust with interest rates very low.

Development of property in this range is huge with the likes of Berkeley homes and taylor Wimpey able to build out all of their land banks and pre-sell all property off-plan.

But it is not enough to sate demand which is for around 150,000 new properties a year, we migh touch just over 100,000 this year; but now commercial property is taking on a lot of the same construction teams.

My two extra pennies is the likes of Heathrow are going to get very delayed in the current environment, but that is for another post.

Anonymous said...

ah, what happened to the zombie companies?

Did they all fold and die?

Have the big UK ones all gone ?

James Higham said...

The very situation of lack of inflation does not seem to concern the populace who think not in the long term. It was summed up here by a taxi driver the other day - boarded up shops and roadworks.

CityUnslicker said...

Anon - Zombie; RBS is the daddy of them all and is still ticking along losing money happily and achieving little...

Steven_L said...

If the USA don't raise rates then why would the UK? There is an election in the USA to be had, so I'd suspect that rates will stay put until afterwards.

But even then, why would they raise them? The whole point of low rates and easing etc has been to make asset prices go up.

So why would they change tack and try to make them go down?

Of course, if a future US administration simply wanted to assert US dominance of the rest of the world, then raising interest rates every month for a year would be a very sensible way to go about it.

andrew said...

Moving away from UK inflation,

Surely adding ~1-2% of your population would have an inflationary impact (Germany)?

Lord Blagger said...

Surely adding ~1-2% of your population would have an inflationary impact (Germany)?


Why? You are going to have to tax more which means less money for Germans to spend.

L fairfax said...

In 2008 I had to choose a mortgage, I chose a tracker because I thought that Brown had screwed up the economy so interest rates would have to drop.
I hope people who liked him chose fixed rate mortgages.